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Getting Funding
or Financing
Bruce R. Barringer
R. Duane Ireland
10-1
Chapter Objectives
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Chapter Objectives
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Personal Funds
Equity Capital
Debt Financing
Creative Sources
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Personal Funds
The vast majority of founders contribute personal funds,
along with sweat equity, to their ventures.
Sweat equity represents the value of the time and effort that a
founder puts into a new venture.
10-7
Bootstrapping
A third source of seed money for a new venture is referred to
as bootstrapping.
Bootstrapping is finding ways to avoid the need for external
financing or funding through creativity, ingenuity,
thriftiness, cost cutting, or any means necessary.
Many entrepreneurs bootstrap out of necessity.
10-8
Coordinating purchases
with other businesses
Leasing equipment
instead of buying
Obtaining payments in
advance from
customers
Minimizing personal
expenses
Avoiding unnecessary
expenses
Hiring interns
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10-10
Debt Financing
Is getting a loan
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Purpose
Elevator
Speech
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Step 1
20 seconds
Step 2
20 seconds
Step 3
10 seconds
Step 4
10 seconds
Total
Copyright 2012 Pearson Education
60 seconds
10-14
Venture Capital
Business Angels
Initial Public
Offerings
10-15
Business Angels
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Business Angels
Are individuals who invest their personal capital directly in
start-ups.
The prototypical business angel is about 50 years old, has
high income and wealth, is well educated, has succeeded as
an entrepreneur, and is interested in the start-up process.
The number of angel investors in the U.S. has increased
dramatically over the past decade.
10-16
Business Angels
2 of 2
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Venture Capital
1 of 3
Venture Capital
Is money that is invested by venture capital firms in startups and small businesses with exceptional growth
potential.
There are about 800 venture capital firms in the U.S.
Venture capital firms are limited partnerships of money managers
who raise money in funds to invest in start-ups and growing
firms.
The funds, or pool of money, are raised from wealthy individuals,
pension plans, university endowments, foreign investors, and
similar sources.
The investors who invest in venture capital funds are called limited
partners. The venture capitalists are called general partners.
Copyright 2012 Pearson Education
10-18
Venture Capital
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Venture Capital
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Reason 2
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Reason 4
Creates a form of
currency that can be
used to grow the
company via
acquisitions.
10-23
Commercial
Banks
SBA Guaranteed
Loans
10-24
Commercial Banks
Banks
Historically, commercial banks have not been viewed as a
practical source of financing for start-up firms.
This sentiment is not a knock against banks; it is just that
banks are risk averse, and financing start-ups is a risky
business.
Banks are interested in firms that have a strong cash flow, low
leverage, audited financials, good management, and a healthy
balance sheet.
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Vendor Credit
Also known as trade credit, is when a vendor extends credit
to a business in order to allow the business to buy its
products and/or services up front but defer payment until
later.
Factoring
Is a financial transaction whereby a business sells its accounts
receivable to a third party, called a factor, at a discount in exchange for
cash.
10-28
Peer-to-Peer Lending
Is a financial transaction that occurs directly between
individuals or peers.
Prosper is the best know peer-to-peer lending network.
Crowdfunding
A form of raising money that takes place, usually via the
Internet, where people pool their money to support a startup or other initiative, usually in return for some sort of
amenity rather than loan.
Kickstarter is a popular online crowdfunding platform.
Copyright 2012 Pearson Education
10-29
Leasing
Strategic Partners
10-30
Leasing
1 of 2
Leasing
A lease is a written agreement in which the owner of a
piece of property allows an individual or business to use
the property for a specified period of time in exchange for
payments.
The major advantage of leasing is that it enables a
company to acquire the use of assets with very little or no
down payment.
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Leasing
2 of 2
Leasing (continued)
Most leases involve a modest down payment and monthly
payments during the duration of the lease.
At the end of an equipment lease, the new venture typically
has the option to stop using the equipment, purchase it for
fair market value, or renew the lease.
Leasing is almost always more expensive than paying cash
for an item, so most entrepreneurs think of leasing as an
alternative to equity or debt financing.
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SBIR Program
The SBIR Program is a competitive grant program that
provides over $1 billion per year to small businesses in
early-stage and development projects.
Each year, 11 federal departments and agencies are
required by the SBIR to reserve a portion of their R&D
funds for awards to small businesses.
Guidelines for how to apply for the grants are provided on
each agencys Web site.
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Strategic Partners
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Strategic Partners
Strategic partners are another source of capital for new
ventures.
Many partnerships are formed to share the costs of product
or service development, to gain access to particular
resources, or to facilitate speed to market.
Older established firms benefit by partnering with young
entrepreneurial firms by gaining access to their creative
ideas and entrepreneurial spirit.
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Strategic Partners
2 of 2
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